Stock performance map shows routes to success

Imagine you are on a cross-country driving vacation to Yellowstone Park in Wyoming with your family. Now, imagine what would happen if no one in the car knew how to read a map! Your family could end up in Mexico, or go in a circle right back to Florida -- anywhere but where you want to go. The same is true with investing in the stock market. You need to understand the map, all those symbols and numbers that give you an indication of where each stock is moving, to help you decide which way to go in reaching your financial goal.

Let's say you are watching the morning news with your parents before school. The numbers scrolling across the bottom of the television screen -- on CNN or CNBC, for example -- are the prices of one share of stock in each particular company. The company is identified by its trading symbol, which is usually an abbreviated form of its name. For example, the symbol for Outback Steakhouse Incorporated is OSI.

The prices of stocks are based on demand and supply. If large numbers of people are buying a stock, its price will rise. The reverse will be true if a large number of people are selling a stock. For example, if the earnings of a company are growing, this may encourage investors (those demanding the stock) to buy the company's stock and encourage current holders (potential sellers of the stock) to hold on to the stock. Likewise, should earnings of a company decline or should its sales forecast be projected to decline, people may want to sell (supply) the stock while buyers may not want to purchase (demand) the stock.

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Now, let's analyze the one-day trading information for ABC Company ( ABCC). At the far left is the 52-week range for the company, and we see that its range has been between $20 and $10 per share. The column headed Div refers to the dividend paid on the stock. The Div column refers to the total yearly dividend paid for each share of stock. (Dividends are usually paid quarterly, but the daily newspaper shows what the dividend would be on a yearly basis.) The Yld (yield) column refers to the percentage return paid on the stock. In this example, the yield is currently 5 percent. (Purchased at today's close of $20 and paying a $1 yearly dividend, the dividend pays (yields) 5 percent on our investment.) However, as the stock price changes, the yield will either rise (if the stock price falls) or fall (if the stock price rises).

The PE (price/earnings) is a ratio showing current price of the stock divided by yearly earnings. For example, in our table above, we are given the PE of 10 and closing price of $20. From this information we can figure that the earnings of the company over the past year was $2. (Apply your beginning algebra to determine the earnings. When we know two of three variables, we can find the third. In our present example, we know that price divided by earnings equals the PE ratio. Inserting our data, we know price and the PE, but we do not know earnings.

To solve for earnings, we use our algebra to come up with the following formula: Earnings equals price divided by the PE ratio. Solving the equation we have: Earnings equals $20 (closing price) divided by 10 (PE ratio). Earnings thus equal $2.

Now, if the price for some reason went to $100, our PE would be 50. (Price of $100/earnings of $2.)

If the price would have moved in the opposite direction from $20 to $10, then the PE would change to 5. Applying your understanding of PE, at which price do you think the stock is more risky? More conservative? As you answer these questions it will become clear that we are assuming more risk when the PE is 50 and less risk when it is 2. Ask yourself if you want your company to earn $2 for every $50 you spend to buy the stock or if you would want your company to earn $2 for every $10 you spend to buy the stock. When you do this, the answer will be clear to you that the PE of 50 is more risky than the PE of 2.

In the volume column ( Vol) is listed the daily volume, or number of shares traded, for each stock. ABC Company had 187,000 shares of stock traded. Volume in hundreds (00s) equals 1870 X 100 equals 187,000.

The Open, High, Low and Close are daily figures which show the price of the first trade of the day (open), the low price of the trading day, and the final (close) price of the trade day. The final column shows the net change; however, this is not the difference between the open and close of one day's prices for the stock. It is the difference between the closing price today and the closing price of the previous market day. Since our net change was zero, we know that the closing price on the previous market day was $20, exactly the same price as it was at today's close.

-- Anna Vanlandingham is an advanced placement economics teacher at Lake Mary High School in Seminole County. She has been a teacher for 20 years and has won several national and state economics education awards. Chapters on the securities industry have been reviewed by the Florida State Comptroller's Office, which is responsible for protecting consumer rights in the securities industry.

About the Florida Council on Economic Education

Money Stuff was developed by the Florida Council on Economic Education and project director Fonda Anderson. The council is a statewide non-profit organization founded in 1975 to educate K-12 teachers and students about the free enterprise system and to instill in them an appreciation for a market economy. For more information on the council's programs for teachers and students, please call (813) 289-8489.

About Newspaper in Education

The St. Petersburg Times devotes news space to NIE features throughout the year, including this classroom series. The Times' NIE department works with local businesses and individuals to enrich the classroom experience by providing newspapers, supplemental guides and educational services to schools in the Tampa Bay area. To find out how you can become involved in NIE, please call (727) 893-8969 or (800) 333-7505, ext. 8969. For past chapters, check out http://www.sptimes.com/nie and click on Money Stuff.